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By Howard Gleckman In the '80s, they were called "revenue enhancements." In the '90s, they were "loophole closers." Now, in a scramble to salvage as much of President Bush's tax cuts as possible, Senate leaders are calling them "offsets."
"Tax increases?" No self-respecting Republican would ever utter such words, but that's what most of these are. Senate Majority Leader Bill Frist (R-Tenn.) is searching for some $30 billion to $50 billion in tax hikes and spending cuts that he wouldd use to rescue the troubled Bush tax plan.
The President's proposal is being scaled back because key Hill moderates, including Senator George Voinovich (R-Ohio), worry that it'll bust the budget. Bush first trimmed his tax cut from $1.4 trillion in January to $726 billion in March. Now he's trying to expand the cut beyond the $350 billion level set by the Senate in mid-April. His prime goal: preserve a big chunk of the plan to eliminate individual taxes on corporate profits, including dividends.
"COUNTERPRODUCTIVE." Voinovich says he would support a dividend tax cut if it's paid for by offsetting tax hikes or spending reductions. That has sent aides to Frist and Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) on a Washington scavenger hunt. Finding offsets is easy -- every senior staffer keeps a list handy. But identifying any that can get 51 votes in the Senate is another matter. "If these were so popular," grumps one GOP aide, "They'd be law by now."
The challenge is finding offsets that don't create new opponents for the plan. A Republican may support a dividend tax cut today. But he'll abandon the package if Frist tries to keep the overall cost down by trimming a key tax break for a home state company. Says House Majority Leader Tom Delay (R-Tex.): "It's counterproductive to raise taxes on one side and lower taxes on another." The strategy also worries lobbyists who fear it will break up the fragile business coalition behind the Bush package. "All that's going to happen here is that people will jump ship," says one GOP lobbyist.
That's one reason why Hill leaders are aiming at tax hikes that cut across all industries and sectors, rather than those that target a particular sector. At the top of the list: a package of measures aimed at curbing tax shelters that has already passed the Senate, but not the House.
FODDER FOR REVENUE. The key proposal is a measure that bars companies from using shelters that don't have a clear economic purpose. Today, many such deals are done only to avoid taxes and have no chance of ever making any money. In addition, senators may also include curbs on corporate inversions, where businesses move their headquarters to Bermuda or other tax havens to cut their U.S. tax liability. These anti-shelter provisions could produce $15 billion over a decade.
Other recent corporate controversies may also provide fodder for revenue-hungry lawmakers. Among them: a $5 billion move to limit the ability of top execs to defer taxes on bankruptcy-proof deferred compensation. Companies such as Enron have used such plans in recent years to protect the pay of senior managers.
Grassley may also try raise about $1 billion by barring companies from deducting disgorged profits and other costs resulting from settlements with the Securities & Exchange Commission, such as the $1.4 billion Wall Street agreement announced Apr. 28. Today, such settlements are largely tax-deductible.
NOT LIKELY. Another possible source of money is through higher fees for companies and individuals who use government services, such as customs and patents aprovals. The White House proposed more than $15 billion in such fees in its budget, although Hill aides say they would be lucky to enact $5 billion.
Republicans will also insist on spending cuts. But coming up with such reductions may prove as difficult as finding tax hikes. The GOP-controlled House crushed an effort to trim spending earlier this year. The best lawmakers hope for: perhaps $20 billion in management savings from unspecified programs. These are the sort of efforts to cut "waste, fraud, and abuse" that pols have been toying with for decades. And none of them is likely to ever happen.
All this hard work may generate $50 billion. That would be enough to allow Bush to claim a tax cut of $400 billion. But even in Washington, cutting some taxes by $400 billion, while increasing other taxes by $50 billion still adds up to a net $350 billion tax cut. It's little more than a fig leaf, but it may be what's needed to get any tax cut at all passed this year. Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views in Washington
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